Anatomy of an Asset Purchase Agreement - Part 1

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Asset Purchase Agreements Demystified

About Asset Purchase Agreements

Asset Purchase Agreements are often long, complicated, and hard to understand. If you learn their common structure, it can be easier to make sense of the parts. This is part one of a three part series about Asset Purchase Agreements (“APA”).

An APA is used to purchase the assets of a business. It might be used to buy part of a business, or to buy an entire business or division.

Outline of APAs

Well-organized APAs tend to follow a common structure, often with the following sections:

  1. Introduction & Background
  2. Definitions
  3. Purchased Assets & Purchase Price
  4. Closing
  5. Seller Representations & Warranties
  6. Buyer Representations & Warranties
  7. Covenants
  8. Conditions to Closing
  9. Indemnification
  10. Termination
  11. Miscellaneous
  12. Exhibits

Each section is briefly discussed below and in the articles that will follow.

Introduction & Background

The introduction to an APA identifies the buyer, the seller, and any other parties. The other parties might include the seller’s owners, the guarantors, or other companies that are related to the buyer or seller.

The background section (sometimes called “recitals”) provides context about the agreement. Sometimes this is as simple as a statement that the seller wants to sell the assets to the buyer. If the APA is part of a larger transaction, the background section will be more detailed.

Definitions

Many APAs begin with a definitions section. This section assigns specific meanings to particular words used in the APA to avoid ambiguity.

Definitions serve as a shorthand for words or phrases that are used multiple times in the APA. Listing the definitions in one place prevents an agreement from getting repetitive and cluttered. It also makes it easier to use the defined terms consistently.

For example, an APA might contain this definition of a “Lien”:

Lien” means any lien, encumbrance, pledge, or restriction.

This way, whenever the APA mentions a lien, it could use the capitalized term “Lien” rather than repeating the longer string of words. Defined terms are usually capitalized throughout the APA, in order to signal that they have a specific definition.

Purchased Assets & Purchase Price

This section is one of the most important ones in the APA. It identifies:

  • the assets that are included and excluded from the sale
  • the liabilities that the buyer is becoming responsible for
  • the liabilities that the seller remains responsible for
  • the purchase price
  • the payment method and timing
  • the purchase price adjustment mechanisms

Closing

This section describes the closing date, time, and location. When the sale is completed, it is called the “closing”. Sometimes a closing occurs at the same time the APA is signed. Other times, the APA signing and the closing are not simultaneous, and the APA is signed first.

This section also describes the procedures for the closing. It’s common to list the documents and agreements that will be exchanged at the closing. Examples include a bill of sale and an assignment agreement. Often, the forms of these “ancillary agreements” will be negotiated in advance and attached to the APA as an exhibit.

Conclusion

The next article will discuss some of the most heavily negotiated sections of APAs:

  • Seller Representations & Warranties
  • Buyer Representations & Warranties
  • Covenants

Asset Purchase Agreements are varied and often complex, but they do share common elements. There is no substitute for legal advice from an experienced acquisitions attorney. That said, you’ll get more out of the legal advice if you have a “big picture” understanding of an Asset Purchase Agreement, which will help you make sense of the parts of it.

Contact us today to discuss your Asset Purchase Agreement.